(Reuters) - Germany'smove to close seven reactors has relinked its power market with coalprices, and many traders said the correlation could be there to stay.
Following the nuclear power plant accident in Japanin March, the German government decided to switch off seven of itsoldest nuclear power plants until a safety review is completed.
Butsubsequent state election victories by the anti-nuclear Green Partyhave led many analysts to believe that these reactors will remain shutand that the remaining ten will also be taken off the grid ahead ofschedule.
To fill the nuclearproduction gap, German utilities have ramped up coal-fired electricitygeneration, and this has resulted in a strong rise in the pricecorrelation rise between the two markets.
"Justhalf a year ago (in September 2010), this same government broke theprice link between power and coal when it announced a life-timeexpansion of nuclear power plants, and now its U-turn is tying thechains right back together," one German utility trader said.
Inthe late months of 2011, coal futures were already on the rise, whileGerman power forwards fell due to the government's nuclear extension.Prices only slightly began to rise after a cold front covered much ofEurope under a thick layer of snow.
Attheir low in early December of last year, the price correlation betweenGerman power prices for baseload (24 hours) delivery in 2012 and API22012 coal futures stood at below minus 0.60 percent, meaning that thetwo products were effectively moving in opposite directions.
Since then, however, the correlation has steadily risen to above 95 percent.
"Itwas the uprisings in North Africa and the Middle East that beganre-aligning power and coal prices, but it took the nuclear re-think inMarch and the resulting jump in power prices to fully re-establish thecorrelation between power and coal," a financial energy trader said.
Mostmarket sources agreed that the closer link between German power andcoal prices was likely to remain intact as the country's rushed nuclearexit would result in a power sector that relies more heavily on coalpower.
"Until many more gas powerplants are built and a lot more renewables are there, Germany is likelyto rely on coal power plants that were initially to be taken off thegrid in the coming years, and that should result in a fairly closepower/coal link in the mid-term," the utility trader said.
(Editing by Jane Baird)